What’s Good for G.M. Is Good For Homeowners

We have been fully conditioned by now to expect that the rich and powerful will get the biggest slice of whatever pie is being served, while those less fortunate — and less well connected — will get the crumbs. But it still rankles when we witness time and time again how big corporations get deals the little guy can only dream about, especially when a little creative thinking could alter the status quo.

Take for instance the incongruity between what banks (and other creditors) are willing to do to allow troubled companies to avoid paying back money that should never have been borrowed in the first place versus what banks are willing to do for distressed homeowners who can no longer afford to make their mortgage payments. Why are banks willing to wipe out billions of dollars of the principal on loans made to corporations but — in most cases — give financially strapped homeowners the binary choice of either making the contractually agreed-upon monthly mortgage payments or face foreclosure and the loss of their home? Why do banks have a willingness to negotiate with corporate debtors but have shown only extreme reluctance to modify mortgages for struggling homeowners?

Why can’t those who face foreclosure get the same sorts of help as bankrupt companies?

For example, when the executives of General Motors and Chrysler finally came to the realization two years ago that their companies had billions of dollars too much debt and other liabilities that they could never pay back or fulfill, they spent months negotiating with their creditors to restructure the debt and then filed for Chapter 11 bankruptcy protection to make final the agreements made with many of their creditors and to get the last, recalcitrant ones to go along.

The holdouts — whether they within their legal rights or not — were jawboned into submission, first by the White House’s “car czar,” Steven Rattner, and then by President Obama himself. In the blink of an eye, both companies were in and out of bankruptcy, having wiped out billions in debt and liabilities. The whole episode was deemed a major political and financial success and very much in the national interest. More hosannas were shared in November 2010, when G.M. went public, and more undoubtedly will be shared again when Chrysler files its initial public offering, likely later this year. Success has many fathers!

Indeed, for corporations across the country, both big and small, using the bankruptcy process to eliminate unwanted debt and liabilities is such an accepted practice that we don’t really give it much thought anymore. That is the beauty of the corporate bankruptcy process (if you care to look at it that way): Creditors must acknowledge they made poor investments by taking a fraction of their original principal and companies get a second chance.

Why, then, can’t a similar process be put in place to help the millions of American homeowners who for whatever personal reasons — usually no less justifiable than those offered up by G.M. or Chrysler — are unable to make their monthly mortgage payments? Why do the corporate fat cats get a respected and legitimate way to flush their unwanted debts but individual Americans homeowners don’t? According to The Times’ Gretchen Morgenson, “Some analysts and leading economists have cited a failure by banks to provide loan modifications as a signal reason that the foreclosure crisis continues to drag on so ruinously, years after it began.” She noted that a recent report by the Congressional Oversight Panel found that some 250,000 new foreclosures are started each month, while 100,000 are completed.

It’s not that the government is unaware of the problem. In 2009, the Treasury created the Home Affordable Modification Program, with the idea of making it more efficient for homeowners to work with banks to modify their mortgages. According to Morgenson, HAMP has modified some 520,000 home mortgages; a far cry from the 13 million foreclosures expected to have occurred by 2012. “By every empirical measure, HAMP has failed,” was the judgment of a February 2010 Congressional study of the program by the Republican minority.

Political jousting aside, obviously much more needs to be done to help homeowners modify their home mortgages. Here’s an idea: Why not have each bank involved in the mortgage origination or servicing business — among them, JPMorganChase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — appoint a “mortgage czar” (and a team of mini-czars) with the power to evaluate the facts and circumstances behind each and every mortgage default. Their aim should be reaching a compromise in as many situations as possible that can keep people in their homes and increase the chances that the banks would get a new, performing loan rather than an empty house in a blighted neighborhood that cannot easily be sold. Elizabeth Warren and her Consumer Financial Protection Bureau can help keep the czars honest.

The banks would howl, of course, that the number of defaults is too daunting and the mortgages are bundled into securities owned by investors all over the world so they can’t find someone with whom to negotiate. But those arguments are mostly bunk. If they can modify loans and bond indentures for struggling corporations — with thousands of individual bondholders, hedge funds and other lenders involved — and declare victory, then surely the same can be done for struggling American homeowners.

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William D. Cohan, a former investigative reporter in Raleigh, N.C., writes on alternate Thursdays about Wall Street and Main Street. He worked on Wall Street as a senior mergers and acquisitions banker for 15 years. He also worked for two years at GE Capital. He is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street,” “The Last Tycoons: The Secret History of Lazard Freres & Co.” and the forthcoming “Money and Power: How Goldman Sachs Came to Rule the World.” In addition to The New York Times, he writes regularly for Vanity Fair, Fortune, the Financial Times, ArtNews and The Daily Beast.